Final Salary (AKA Defined Benefit) Pensions
Firstly, not all advisers are alike and in order to advise on occupational schemes with “safeguarded benefits”, you need to hold specialist permissions (granted by the FCA) and additional qualifications over and above those normally needed to practise. Here at Financial Fortress we actually have 2 “level 6 Pension Transfer Specialists” who each hold advanced qualifications so you really are in very safe hands!
Occupational pensions take many forms and the most common is probably the “defined benefit” scheme or “final salary pension”. Simply put, these do not have a personalised pot of money behind them but are essentially a promise from an employer.
Usually your retirement income is a specified % of your final salary multiplied by the number of years you worked there. Where you left employment before taking benefits, it is then re-valued annually until your schemes retirement age to take account of inflation.
Occupational schemes also have a “normal retirement age” and if the employee wants flexibility to retire earlier, the expected income would be reduced accordingly. There is also a formula laid down for calculating the tax free cash lump sum which may also limit the amount available and not be the normal 25%. We call this “commutation”.
What people do not usually understand is that many schemes in the UK are also underfunded so if your employer (or ex-employer) was to get into financial difficulty and go bust this could jeopardise your financial security. If this were to happen then the “Pension Protection Fund” may apply but prior to retirement age, means your promised income will be reduced.
Most clients don’t realise that a “cash equivalent transfer value” may be available instead which, simply put, is a lump sum alternative where you give up rights to the final salary promised. This lump sum must then be transferred into an alternate pension fund of your choice.
Once transferred, it can then be drawn “flexibly” under the modern pension tax rules (25% tax free and 75% taxable). This is not a decision to take lightly however and this is why the government has insisted anyone who has more than £30,000 “safeguarded benefits” and contemplating this action must take suitable & qualified financial advice.
Want a simple answer as to what is the best thing you could do? Easy, just answer us one small question? ……What date will you die? Problem is we don’t know so this makes transferring out a high risk proposition!
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